Executive Compensation in Controlled Companies

Abstract

Conventional wisdom among corporate law theorists holds that the presence of a controlling shareholder should alleviate the problem of managerial opportunism because such a controller has both the power and incentives to curb excessive executive pay. This Article challenges that common understanding by proposing a different view based on an agency problem paradigm. Controlling shareholders, this Article suggests, may in fact overpay managers in order to maximize controllers’ consumption of private benefits, due to their close social and business ties with professional managers or for other reasons, such as being captured by professional managers. This tendency to overpay managers is further aggravated by the use of control-enhancing mechanisms, such as dual-class structures, which distort controllers’ monitoring incentives.

The Article uses a unique approach to question conventional beliefs on executive pay by reviewing the ISS recommendations on say-on-pay votes, finding empirical indications that compensation packages in U.S. controlled companies appear to be a bigger problem than initially predicted. It, then, concludes by calling for a new regulatory approach: reconceptualize the pay of professional managers in controlled companies as an indirect, self-dealing transaction and subject it to the applicable rules that regulate conflicted transactions.

Keywords: Corporate governance, executive pay, controlling shareholder, say-on-pay, ISS

JEL Classification: G18, G30, G32, G34, G38, K22